Why EVERY Company Must Be a Tech Company – Apple, Amazon, Facebook, Instagram Lessons

Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround. Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets. And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.

Recently Apple's value peaked at $600B. Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!

This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.

Unless we look at this information in the context of a major, global economic shift. That what the world values has changed dramatically. And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information. Not land, buildings or the ability to make things.

Three hundred years ago the wealthiest people in the world owned land. Wars were fought for centuries to control land. Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land. As changes came along, reducing the role of kings, land barons became the wealthiest people in the world. In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.

But then some 120 years ago, along came the industrial reveolution. Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans. With this shift, value changed. The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy. Worth more than most states, and many foreign countries.

The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor. Creating tools – from entignes to automobiles to airplanes – created great wealth. Knowing how to make these machines, and making them, created enormous value. And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced. And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well.

By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department. By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle. Across the developed world, wealth shifted into the hands of industrial companies from landowners.

Sometime in the 1990s the world shifted again, and that's what the chart above shows us. Countries with little or no technology companies – no information economy – cannot create value. On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value.

Think about the incredible shift that has happened in retail. America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears. In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings. But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!

Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state. Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.

Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors. In the last 5 years, Amazon's value has roughly quadrupled!

Yes, Amazon is a retailer. But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy. As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company. By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.

By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building. By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.

We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment. In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these – the value can decline, decline fast, and decline far. Just because these things are easy to see and count does not insure value. They can easily be worth less than they cost to make – or own.

Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach. Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs.

Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week. In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.

On a cost-per-existing-customer basis, Facebook stole Instagram. And that's before Facebook spreads out the solution to the rest of its 780million users! Forget about how many employees Instagram has, or its historical revenues or its assets. In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!

Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly. Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x. That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.

Going forward, no company can plan to survive with an industrial strategy. That approach, and those rules, simply don't create high returns. To be successful you MUST become a tech company. And while this may not feel comfortable, it is reality. Every business must shift, or die.

8 thoughts on “Why EVERY Company Must Be a Tech Company – Apple, Amazon, Facebook, Instagram Lessons”

Excellent post Adam. I find it ironic though, very little attention is paid to the information sector by our government in its effort to stimulate the economy.
This is well apparent with lack of technology entrepreneurs and experts close to the president. It make big news if he even decides to fly to the “west coast” to meet with the companies that are driving what’s left of our country’s competitive advantage.
“Holding on to Yesterday” is a song from the ’70s … not a competent government economic strategy.

Agree with you Clay that the government is far too fixated on historical economic practices, and far too weak at looking forward. Ben Bernanke, et.al., seem mystified that their actions – based upon their understanding of 1930s industrial America – just aren’t working as well as they’d like. Imagine that, we just might need different solutions 80 years later!!!

Instagram, like so many tech companies today, uses Amazon Webs Services for its infrastructure. With AWS, companies can get started with very little investment and can scale very easily and rapidly. AWS is a remarkable enabler of wealth creation and was created without government funding.

This is really a very nice post. Charts are very much understandable. I cannot let this opportunity pass to endorse this stock charting tool by blastchart.com so you could make your stock charts even better.

Apple makes things
Without the chips, the screens, the manufacturing technologies, without the Silicon, the GaAs, they have nothing to build their system into.
Amazon would have nothing to sell if no one made things.
Information does not make things, the analogy is flawed.
So what if Apple is bigger than GE, without GE (and companies like them) you would have no MRI to improve and save peoples lives (sorry Steve you did not believe in western medicine!)I, no jet airplanes to get from A to Z (the Apple execs to Foxconn) and no Hubble Space telescope to find out about our Universe.
In short, software and media run on hardware and Apple is successfull because they make good hardware, using know technology with their own “industrial design, and have good software and media.
Making things is a good thing and without high technology manufacturing, materials sciences, semiconductors, and the like, Apple has not much to do.
We cannot loose our industrial base and become like England, a land of good Universities that creates nothing but an ever declining social welfare state.
All companies cannot be Apple or Amazon, the economic ecosystem requires innovations in many many “things” that are invented, designed and manufactured so Apple and Amazon can be and do what they do so well.

I have to agree with the last post. If we are all in tech companies then the iPad is not much good if you cannot buy a Pizza (itself made from other goods). There will always be some small amount of companies that innovate beyond the accepted “norm”. These companies will always be successful. But the next time you get in your car (1900 invention), get your Burger (McDonals anyone from the 1950’s), fly to your next meeting (flight took off after WW2), get into you wonderful comfortable bed at a well known Hotel chain(1920’s?) and watch a wonderful movie (1920?) and drift off to sleep: then think again about what needs to be innovated…

Apple’s great value increase is about more than one company. It reflects the economic shift away from industrialism toward information. For companies to grow, and prosper they MUST begin thinking like tech companies, dropping interest in “hard assets” and “industrial processes” and adopt the new competitive mantle of information and the technology built around information.